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Neel Kashkari, Pimco’s head of global equities, expects markets to remain volatile for the rest of the year as investors focus on the willingness of Democrats and Republicans to come together.

Kashkari sees a 60% to 70% chance that about two-thirds of the provisions in the fiscal cliff will get “punted” for six months to a year, allowing for the economy to avoid a recession and experience very moderate economic growth.

Unemployment benefits and the payroll tax cut will likely not get extended, while the hike on dividend and capital-gains taxes, the expiration of the Bush-era tax cuts and required defense spending cuts will get kicked down the road, according to Kashkari, who oversaw in 2008 the federal bailout for the financial sector known as TARP.

That, however, is the base-case good scenario. Democrats and Republicans can make things much worse if they go over the cliff altogether, which carries with it a 30% chance of another recession, or engage in extreme brinkmanship before they punt, Kashkari said. Such scenarios would result in the same sort of extreme volatility that occurred with the debt-ceiling wrangling last year, which damaged confidence.

“They did real damage because then investors are afraid to make investment decisions,” Kashkari said. “It’s a big magnifying glass on how Washington is broken and how much distance there is between Democrats and Republicans.”

Dan Greenhaus, chief global strategist at BTIG LLC, sees falling off the fiscal cliff as a base-case scenario and projects the S&P 500 index
SPX, -0.40%
could fall as low as 1,200 by the end of the year.

The S&P 500 has rallied more than 11% year-to-date, but slumped 2% on Wednesday to 1,399.79 in afternoon trade.

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“The tone has to be give and take,” said Brian Belski, chief investment strategist at BMO Capital Markets, adding that market angst will diminish if an accord is reached between the Obama administration and the Republican-led House of Representatives.

One possible tactic would be for the Obama administration to create new tax incentives for businesses to begin hiring in return for the elimination of the Bush-era tax cuts, Belski said.

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